Introduction to Segregated Funds Presented by: Sarah Daly Date: January 19, 2009 HEPC

Agenda What are Segregated Funds and what can they offer? Guarantees Resets Potential Creditor Protection Probate Protection Who Might Find Segregated Funds Attractive? Empire Life in the Segregated Fund Industry Empire Life Segregated Funds

What are Segregated Funds and what can they offer? Segregated Funds are investment funds that pool together the assets of investors like you with similar objectives who want to: diversify their investments; reduce their risk and; lower their investment costs. In addition, they also offer: Minimum of 75% Maturity Guarantee on net deposits 100% Death Benefit Guarantee Resets Creditor Protection Estate Planning

Guarantees There are two types of Guarantees: Maturity Benefit Guarantee (MBG) Death Benefit Guarantee (DBG)

Maturity Benefit Guarantee (MGB) A unique feature of segregated funds is that they offer capital protection of a minimum of 75% of the client’s net deposit and up to 100% of the client net deposit. There must to be at least 10 years to the maturity date Tip: Segregated funds can be good for some long-term investors who want to invest in equity mutual funds but who are not comfortable with the risk.

Death Benefit Guarantee (DBG) The DBG varies from 75% to 100% of the client’s net deposits

How Guarantees Work-Worst Case Scenario Client invests $100,000 Example. John invests $100,000 in segregated fund policy and names his wife as plan beneficiary.  The policy offers a 75% guarantee on maturity and 100% on death. If at the time of Peter’s death, the plan is worth $100,000, his wife will receive the full $100,000. If in 10 years the contract is worth $100,000, Peter will receive the full $100,000. If in 10 years the plan is worth $50,000, Peter will receive the guaranteed amount $75,000. *All numbers are hypothetical used for illustration purposes only

How Guarantees Work-Best Case Scenario Client invests $100,000 Let’s assume that after 10 years the market value became $122,000. This becomes the new policy value at maturity. Market Value Guaranteed Value *All numbers are hypothetical used for illustration purposes only

Resets Resets = lock-in gains when the policy market value is higher than the guarantees Resets can either be automatic or manual Maturity dates could be extended with resets Need a minimum of 10 years to maturity date

How Resets works Above is an example illustrating the benefits of resets. Anne deposited $100,000 in December 1991 in an aggressive portfolio. Anne decides to reset once every year. Resets can only be made when there is at least 10 years left before maturity. Therefore Anne is allowed 5 resets from 1991 to 1996. As can be seen, no resets were made when the market was down, and the last reset locks-in the gains and the new amount becomes Anne’s new guaranteed amount. If Anne had not reset, her policy value after 15 years would have been $417,725 instead of $449,935, as her investment would be making on average 10% Calculations were based on 80% S&P/TSX Index and 20% Scotia Universe Bond Index, from Dec. 91 to Dec. 06 **Calculations were based on 80% S&P/TSX Index and 20% Scotia Universe Bond Index, from Dec. 91 to Dec. 06

Potential Creditor Protection When certain qualifications are met, segregated fund investments may be protected from seizure from creditors. This is an important feature for business owners or professionals whose assets may have a high exposure to creditors.

Potential Creditor Protection Example Frank, a business owner, had died leaving a non-registered seg fund to his wife, and named his wife as the beneficiary. His business had gone bankrupt shortly before his death and his estate still owed the bank a large amount of money. True or False Answer: False-The bank can seize everything except the seg fund, because the seg fund was in Frank’s name and his wife was named beneficiary

Probate Protection Avoid Probate and estate fees Transfer assets without delays Distribute assets with privacy

Probate Protection Example   Non-Registered Mutual Fund Non-Registered Seg Fund Deposit $150,000 Market Value upon death $135,000 $132,000 DSC $6,750 Waived by Empire Life Probate and estate fees* $1,525 None Death benefit Top-up $18,000 Timing of payment Several weeks or Longer A Couple of Weeks Amount to Beneficiaries $126,725 *Based on Ontario probate fees

Who Might Find Segregated Funds Attractive? People who aren’t interested in managing their own investment daily Investors who are attracted to some guarantees of their original deposit (less a proportional reduction for any withdrawals) Self-employed individuals and certain professionals, such as engineers, doctors, etc., who have a high degree of potential creditor and liability risks More affluent investors looking to preserve their wealth and keep some investments private ( outside the will)

Difference in 1% change in MER The following chart shows how a high MER can erode a policy’s growth over time. Compare five different funds with MERs from 2.5% to 3.5%, earning an 8% gross return. Over 10 years, the client investing in a fund with the 2.5% MER would make $1,551 more than the fund with the highest MER, or 10% more. Assumes: Both funds earned 8% gross return with no front-end or back-end loads. The average annual compound returns reported would be 5.5% for the fund with the lowest MER and 4.5% for the fund with the highest MER.

Scenario Jim Henderson has owned and managed the Mill Street Grill for 6 years. Jim is in his second marriage, and has two children from his first marriage. Jim is 20 years away from retirement. $100,000 to invest, 48.80% Income Tax bracket Jim’s Objectives and concerns: Interested in capital preservation and creditor protection Hopes to minimize taxes and expenses on his estate He wants his heirs to receive their inheritance quickly Jim wants to leave certain amounts to his two children privately, outside of the will

Jim’s $100,000 Investment Performance in a Registered segregated fund* Empire Elite Equity: $100,000 initial investment on 9/30/1987; subsequent investments of $100 every 3 months. Income and capital gains tax liability periods are shown, using 36.60% for capital gains taxes and 48.80% for Income taxes (based on the province of Ontario). Jim has the option to reset twice per calendar year, he can do so in the 10 years. *Source: GlobeHysales (Empire Life Elite equity fund – class A

Registered vs. Non-registered The Tax Deferred Accumulation plan illustrates the advantage of tax-deferred growth by showing the difference in final investment amounts for both a taxable and tax-deferred scenario. Note that Tax-deferred investments will eventually be taxed. Jim’s initial investment of $100,000 will grow to $499,096 in 20 years in a registered Empire Elite Equity fund, earning on average 8%, compared to only $255,403 in a taxable instrument. This is assuming that Jim is in the 40% tax bracket. Source: Globe Hysales

Traditional Mutual Funds Get more for your money with Segregated Funds.   Segregated Funds Traditional Mutual Funds Maturity Guarantee Yes No Death Benefit Guarantee Ability to Lock-in Gains Through Re-set Option Potential for Creditor Protection Yes (bankruptcy protection only) Freedom from Estate and Probate Fees Only occasionally on registered plans Deposits protected by consumer protection organization (within prescribed limits) Yes (Assuris)

Guaranteed Minimum Withdrawal Benefit Similar to a pension plan Provides a minimum guarantee payment of 5% for life Commencing age 65 or later Same features as a segregated fund with added guaranteed income Lock in market gains every 3 years providing for an increase in current and future income stream

Questions?

Disclaimer Past performance is no guarantee of future performance. Empire Life Portfolio Funds currently invest in Class A units of the secondary funds. The information in this presentation is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made or misuse or omissions of the information contained in this presentation. Please seek professional advice before making any decision. A description of the key features of the individual variable insurance contract is contained in the Information Folder for the product being considered. Subject to any applicable Death and Maturity Benefit Guarantee, any part of the premium/deposit or other amount that is allocated to a Segregated Fund is invested at the risk of the Plan/Contract Owner and may increase or decrease in value according to the fluctuations in the market value of the assets of the Segregated Fund. TM Trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company. September 2008

Introduction to Segregated Funds